The Housing Commission’s ‘Trojan Horse’
Aug 23, 2011
by Will Carless
In late 2008, as foreclosures flooded the local housing market and the nation's economy hovered on the brink of meltdown, the San Diego City Council scrambled for ideas to tackle the crisis here...
The San Diego Housing Commission responded with a plan: It could buy foreclosures and tackle the city's epidemic head-on. But the commission, which is overseen by a board of unelected appointees, first wanted to be set free.
The agency wanted to buy properties without the City Council's approval. Waiting as long as 90 days for the council to approve the bids would unnecessarily delay highly competitive deals that had to be done quickly, the commission argued.
The City Council agreed. At a March 2009 public meeting, it approved a new policy for the agency, handing it the power to spend public money buying property with radically reduced oversight. Given that this was about fighting the foreclosure crisis, Councilmen Tony Young and Ben Hueso reasoned that cutting down on bureaucracy made sense...
In the two and a half years since that meeting, however, the Housing Commission has rarely used its new power to buy foreclosures.
The agency has bought just eight foreclosed single-family homes and one foreclosed apartment building in that time. That's 45 units out of 756 units the commission has bought or built since then.
Rather than mopping up after the foreclosure crisis, the agency has instead used its new freedom to spend more than $70 million buying non-foreclosed apartment buildings and lending developers tens of millions of dollars to build new affordable apartments.
The commission has been able to make those deals while bypassing the City Council, avoiding the public scrutiny it once would've faced.
Three of the City Council members who approved the Housing Commission's new rules now say they had no idea the power would be used for anything but tackling the foreclosure crisis.
Former Councilwoman Donna Frye called the policy a "Trojan horse" that has allowed the commission almost free reign to build a huge affordable housing portfolio using public money, while facing little public oversight.
Commission officials and the policy's chief proponent, Councilman Todd Gloria, say they made every effort to communicate the far-reaching effect of the agency's new power when the policy was approved...
But the stated motivation for the new freedom, the public hearing in which it was approved and even the report to the City Council all came under the banner of addressing foreclosures. The need for the new power was never fully explained to the City Council or the public. Nor did the agency ever explain how the policy was actually supposed to help it fight foreclosures.
The freedom was also granted at the same time the commission prepared to enter a new era as a heavyweight property investor and developer, an endeavor that was far riskier than simply buying up foreclosures.
The commission's expanding role gave it all the more reason to properly explain the implications of the new rule, said Councilman Kevin Faulconer, one of the three council members who say they were duped.
"The focus of that policy change was clearly on the issue of foreclosures," Faulconer said. "If, in fact, the Housing Commission wanted to go and do something different, what I expect is for them to come and get permission to do so, and then to follow the rules."
In early 2009, few political buzzwords had greater cachet than "foreclosure." Across the city, the wreckage of the busted housing market had created neighborhood eyesores and destroyed family dreams.
At the same time, the Housing Commission was on the move. It had just hired a new CEO, replacing the agency's former leader, Betsy Morris, who had led the agency for 14 years.
New chief Rick Gentry was a veteran of the affordable housing industry and had taken the reins at an exciting time. A massive real estate deal was about to flood the commission's coffers with almost $100 million to spend exclusively on acquiring new property.
That move had been in motion long before the City Council asked the commission for help on foreclosures. Before leaving the agency in 2008, Morris had signed off on a deal to transfer more than 1,300 properties from the federal Department of Housing and Urban Development's public housing program to the commission.
The plan was to take out loans against those properties, giving the agency the cash to spring onto the local affordable housing development scene in a big way...
But the commission wanted to make those deals without first discussing them at public City Council meetings. Gentry and Gloria, a former housing commissioner, said that would reduce bureaucracy, allowing the agency to quickly take advantage of the slumping market by bidding on deals.
Being able to make deals unilaterally represented a significant change in how the commission did business. Since the agency‘s creation in 1979, it had been required to bring each of its acquisitions to the City Council for approval.
Changing that requirement faced one crucial hurdle: The City Council had to be convinced that devolving such far-reaching power to the commission was necessary.
Commission officials presented the sea change to the City Council as a minor element of their broader plan to tackle foreclosures...
Spirits were high when the City Council met on March 24, 2009. The Housing Commission had a plan to tackle the foreclosure epidemic, the council was relieved, and the platitudes were flowing...
How would the policy actually address the foreclosure crisis? Nobody asked. And nobody explained it.
In the absence of any explanation, Frye, Faulconer and Councilman Carl DeMaio thought they understood the plan: The commission would buy foreclosed single-family homes that would otherwise fall into disrepair — the boarded-up homes Young had talked about...
Hueso, Young and Gloria were on board, too. They'd met privately with Gentry in the run-up to the meeting. They later said they fully understood what was going on, and knew the change would allow the agency to make any acquisitions without prior City Council approval.
A spokeswoman said Councilwoman Sherri Lightner also knew the policy didn't only apply to foreclosures.
The council's decision to sharply reduce public oversight over the spending of tens of millions of dollars took 27 minutes.
It was approved unanimously.
Now the Housing Commission had more power and more freedom.
Gloria and Gentry said the commission originally planned to use its new power to buy foreclosed apartment buildings to convert into affordable housing. That was part of the agency's plan to address the foreclosure crisis, they said.
But the commission only bought one foreclosed apartment complex and was outbid on another.
Even if the commission had bought more than one foreclosed apartment building, it wouldn't have done anything to fight the foreclosure crisis.
Unlike foreclosed single-family homes being boarded up, foreclosed apartment buildings were hot properties in 2009. They still are today. In San Diego, so-called "vulture investors" have been snapping up foreclosed apartment buildings as soon as they go on sale. That's one way investors have taken advantage of the slumping real estate market.
The commission had really gotten permission to become one of those investors: It wanted the freedom to snap up distressed bargains that lots of other people also wanted to buy.
Someone would've bought those foreclosed apartment buildings anyway. Whether it was the Housing Commission or some other investor made no difference to the city's foreclosure epidemic.
Local housing market expert Gary London said taking advantage of the foreclosure crisis is fundamentally different than helping stabilize the market or aiding struggling homeowners.
"The Housing Commission perverted the foreclosure crisis for reasons of their own profit," London said. "Call it what it is, it has nothing to do with helping foreclosures and to suggest it does is either felony stupidity or downright lying."
Since the 2009 meeting, the Housing Commission has been on a development tear, investing almost $30 million of the public's money to develop six apartment projects from Nestor to Torrey Highlands.
Those deals weren't about boarded-up homes or foreclosures. And they were far more complicated and risky than the simple property purchases half the City Council expected.
Those development deals most concern Frye, DeMaio and Faulconer. They're furious the projects weren't brought to the City Council for a final discussion and vote.
Development projects have a far greater risk of going wrong than straightforward property purchases. Construction can go awry, costs can shoot up and financing can go sour. The commission is largely beholden to the private developer it chooses as a partner, because the developer oversees construction and selects the company that manages the building once it's built.
That developer also receives a fee, paid out of public dollars. On most of the development deals put together by the commission, that fee was $1.4 million...